Clarity In Tax Matters
The Government of India brought in a retrospective amendment in 2012 to nullify the Supreme Court judgement in the case of Vodafone International Holdings B.V. to tax capital gains arising from transfer of shares or interest in a foreign company deriving its value ‘substantially’ from Indian assets. However, the Government left the task undone by not defining the phrase ‘substantial value’. OECD/ UN material, Dr. Shome Committee Report and the Direct Tax Code Bill (‘DTC’), 2010 provide for 50% threshold test for substantiality which was recently applied by the Delhi High Court ruling in case of Copal Research Mauritius Limited (W.P.(C) 2033/2013). However, the DTC Bill, 2013 which replaced the DTC 2010 provided for 20% threshold to determine ‘substantial value’ of shares. Further, the tax law also does not provide the methodology for computation of capital gains in case of indirect transfer of Indian assets.
Consider a global deal where shares of a foreign company, which holds shares of an Indian company as well as shares of companies in various other jurisdictions, are being transferred on 31 December. The tax authorities require and expect the non-resident seller(s) and buyer(s) to firstly attribute value to the Indian business. The tax laws in India do not prescribe any guidelines on the valuation method to be adopted to determine the value of Indian assets i.e. whether the discounted cash flow method or any other internationally accepted methodology is required to be adopted.
Fact remains that the statutory procedure/ obligation will need to be complied with by the buyer(s) and seller(s) in the transaction. The procedural aspect is applicable as is and was not amended even after the retrospective amendment to facilitate deposit of the withholding tax with the Government required to be made by the non-resident buyer(s) who would more likely not have a bank account in India, a requirement for making payment of taxes online.
Assuming that the parties mutually arrive at the amount of withholding tax and the foreign buyer(s) withholds such tax from the consideration payable to the foreign seller(s) on 31 December, the foreign buyer(s) has to then comply with the following withholding tax related compliances:
obtain tax registration numbers i.e Permanent Account Number (“PAN”) and Tax Deduction Account Number (“TAN”) from the Indian tax authorities, which takes 10-12 working days;
obtain State Bank of India Telegraphic Transfer Buying Rate (“SBI TT Buying Rate”), the specified exchange rate prescribed under the Indian tax laws, for the relevant currency in which the transaction takes place as on the date of deduction of taxes for depositing such taxes with the government treasury; and
pay the amount of taxes withheld (in Indian rupees) on or before 7 January, for this firstly the foreign buyer(s) needs to identify a person resident in India who can assist in depositing the taxes (since the buyer does not have an Indian bank account) and secondly, there would be a time lag between remittance of funds from overseas bank account and the receipt of the such funds in the bank account of a person resident in India. The process may be time consuming and the foreign buyer(s) may not be able to meet the dead line of 7 January.
In the above case, the delay in depositing the taxes is due to reasons beyond the control of the foreign buyer(s) and it is not that the buyer did not intend to comply with the law of the land. Any delay caused in paying / depositing withholding tax results in interest liability for the buyer(s) which is triggered from the date on which the taxes are withheld till the date of deposit of such taxes and is payable at the rate of 1.5% per month or part of the month. In the above example where the consideration is paid on 31 December and due to procedural hindrances a bonafide buyer(s) was able to pay taxes say only on 8 January, as per the current laws interest will be calculated for 2 months (i.e. calendar months of December and January) even though the actual number of delay in days is eventually only 8 days i.e. from the date of deduction of taxes to the date of deposit of taxes.
Even if the foreign buyer(s) takes a stand that interest is payable only for one month at 1.5%, as the actual number of days is 8 days i.e. less than 30 days, deposits the same with government treasury and later files the withholding tax statement online with the Indian tax authorities, the online system generates a ‘Justification Report’ upon processing of the withholding tax statement. The ‘Justification Report’ identifies any errors in the statement. The automated report so generated places an obligation on the buyer(s) to pay such sum (additional tax and/ or interest) mentioned therein. However, the buyer(s) has no right to submit its plea under provisions of the Indian tax laws as the ‘Justification Report’ is technically not an ‘order’ under the law and hence, an appeal cannot be filed until the tax authorities raise a demand on the buyer(s). This seems to be harsh and against the principles of natural justice for the non-residents, as there are no alternate remedies available to the foreign buyer(s) during the interim period.
Clarity in provisions of the tax laws will be a great help. It is desirable that the upcoming budget brings certainity on the determination of taxation of indirect transfer of Indian assets and provides clarity in computing capital gains. It will be great if the upcoming budget could also clarify that ‘month’ for the purposes of computation of interest would mean period comprising of 30 days and not the ‘calendar month’ (given the absurdities arising due to this). Further, increasing the timeline for depositing withholding taxes from 7th day of the month following the month in which the transaction takes place to say 15 days would do away with the hardships faced in M&A transactions as highlighted above.
